Abstract
I estimate the causal effect of local automobile dealer competition on dealer and manufacturer local advertising. I instrument for intra-brand competition using variation in the effect of state franchise termination laws across markets and brands. I find that greater intra-brand competition is associated with lower local advertising by new car dealer and greater local advertising by manufacturers. The results are evidence that manufacturers can encourage retail relationship-specific investments by providing market power downstream. Additionally, the results support the predictions of theories of advertising and horizontal competition and provide novel evidence on how vertically related firms substitute selling effort. I discuss the relevance of these findings to the effects of state automobile franchise regulation and the recent financial troubles of US car manufacturers.
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